APPLE ‘RADIO’ LATEST EVOLUTIONARY STEP FOR AILING MUSIC INDUSTRY

Apple’s announcement Monday that it will get into digital “radio” is just the latest step in the painful evolution of the music industry since the Internet started to destroy its old business models.

After years of false starts, Internet radio has seen healthy growth recently. Competitors include Pandora, Spotify and Slacker (a San Diego company).

It won’t be clear until after Apple’s fall launch whether music fans will flock to iTunes Radio, but hundreds of millions of consumers already own its devices. And Apple is simultaneously undercutting Pandora’s price and offering more revenue to the music industry. If Internet radio becomes a huge business, major competition could boil down to Apple and Google, with its new Google Play product.

The music industry could certainly use a boost. Executives recently celebrated an astonishing number — global sales increased 0.3 percent in 2012 at $16.5 billion. It was the first increase since 1999, when revenues peaked at $38 billion.

That’s brutal. An entire industry’s sales fell by more than half in 13 years. During the same period, the world’s population grew by 1.1 billion, with incomes rising sharply in India and China.

Piracy accounts for most of the carnage. As a former record company president summed it up for me in 1999: “The Internet is destroying a great business. Worse than that, it’s teaching our kids that it’s OK to steal.”

Marquee artists have been able to replace some revenue the hard way, with heavy touring. Yet even that’s requiring more imagination.

Country rocker Kid Rock has made an unusual deal with promoter Live Nation Entertainment that sets concert tickets at $20 to pump up attendance and gives him a cut of beer sales. But the deal transfers some financial risk from the promoter to Kid Rock, The Wall Street Journal reported last week.

Meanwhile, optimism is returning to the recording sector. Revenues are rising again, however microscopically. According to the International Federation of the Phonographic Industry, digital sales rose to 34 percent of total revenues — putting music far ahead of print, movies and other media in adapting to the new distribution paradigm.

In many countries, fewer customers are stealing music, partly because of highly publicized prosecutions of illegal downloaders. And big advertisers are boycotting illicit sharing sites.

However, a bigger factor appears to be growing customer acceptance of buying digital music, driven by the proliferation of cool gadgets and services that let people listen to music legally.

This brings us back to Apple. ITunes Radio will be a Pandora-like service that streams music to paid subscribers, or free with advertising.

It’s a big about-face for Apple, whose late CEO, Steve Jobs, argued for years that customers wanted to own their music. Nobody wanted to “rent” music, only to see it disappear if they stopped paying a subscription fee, he said.

Jobs, who died in 2012, either saved or hurt the music industry, depending on your view of history. He saved Apple from near-bankruptcy with the iPod music player, which taught millions to convert CDs into digital files, making music vastly more portable.

Several local companies sprang up to help people organize their music. In Rancho Bernardo, MusicMatch developed software for “ripping” CDs to the mp3 type of digital file, and navigating collections on a computer. MusicMatch launched an Internet radio service, and Yahoo bought the company for $140 million.

More prominent — and feared by the industry — was
Mp3.com, a San Diego company that allowed users to access their music online. It was sued by the music industry, and sold in 2001 for $372 million to Universal Music, which later shut down the service.

Although mp3 files were popular with consumers, their easy portability also made them prone to illegal downloading on services like the original Napster.

As theft surged, Jobs by 2003 convinced the world’s major music labels that they were better off letting him sell copy-protected downloads legally, via Apple’s new iTunes store. The price was initially 99 cents for a song, and $10 for a whole album.

This innovation slowed piracy some, mostly because the iPod, and then later the iPhone, were such huge hits, helping to drive music and video sales. But, in a throwback to the popularity of 45 rpm records, the low price for singles also drove customers to buy just their favorite songs, and eschew the more-expensive albums. This cut into lucrative CD sales and undermined legal album downloads.

But it sure worked for consumers. Today Apple is the world’s largest music retailer. With iTunes Radio, it’s pressing its advantage.

As always, Apple is worried chiefly about Apple — iTunes Radio is designed to keep customers firmly within its ecosystem by offering them more to do with its gadgets. But if radio is another Apple hit, it might also end up helping the music business, too.